The July 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices
addressed changes in the supply of, and demand for, bank loans to businesses and
households over the past three months. The survey included a set of special
questions that asked respondents about lending to European firms and their
affiliates and subsidiaries. This summary is based on responses from 57 domestic
banks and 23 U.S. branches and agencies of foreign banks. 1

The July survey indicated that, on net, banks had eased standards and terms
over the previous three months on loans in some categories, particularly those
categories affected by competitive pressures from other banks or from nonbank
lenders.2 While the survey results suggest that lending
conditions are beginning to ease, the improvement to date has been concentrated
at large domestic banks.3 Most banks reported that demand for business and
consumer loans was about unchanged.

Domestic survey respondents reported having eased standards and most terms on
C&I loans to firms of all sizes, a move that continues a modest unwinding of
the widespread tightening that occurred over the past few years. Moreover, this
is the first survey that has shown an easing of standards on C&I loans to
small firms since late 2006.4 Significant net fractions of domestic banks also
reported having eased their pricing of C&I loans to firms of all sizes.
Banks pointed to increased competition in the market for C&I loans as an
important factor behind the recent easing of terms and standards. Demand for
C&I loans from large and middle-market firms and from small firms was
reportedly little changed, on net, over the survey period after declining over
the three months prior to the April survey.

On net, large domestic banks reported having easing standards and terms on
almost all of the different categories of loans to households. Other banks
showed either smaller net fractions having eased lending policies or a net
tightening of lending policies. Regarding residential real estate lending, a few
large banks reported having eased standards on prime mortgage loans, while a
modest net fraction of the remaining banks reported having tightened standards
on such loans. Banks reported an increased willingness to make consumer
installment loans, on balance, for the third consecutive quarter, and small net
fractions of banks reported having eased standards on both credit card and other
consumer loans. By contrast, small net fractions of respondents reported having
tightened the terms and conditions on credit card loans.

Questions on commercial and industrial lending. The results
of the July survey indicated that a modest net fraction of domestic respondents
had eased standards for lending to large and middle-market firms over the
previous three months--the second consecutive survey showing such an easing. For
the first time since 2006, banks reported having eased their lending standards
on C&I loans to small firms. In particular, around one-fifth of large
domestic banks reported having eased lending standards for small firms, which
offset a net tightening of standards by a small fraction of other banks.

Many banks indicated that they had eased terms on C&I loans, with
especially sizable net fractions of domestic banks reporting that they had
reduced spreads of loan rates over their bank's cost of funds and had trimmed
the costs of credit lines. On net, large domestic banks had eased each of the
seven surveyed loan terms for firms of all sizes. Other domestic banks reported
a net easing of the spread of loan rates over their own cost of funds and of the
costs associated with credit lines, but small net fractions of those banks had
increased premiums for riskier borrowers and had tightened the majority of
nonprice loan terms, particularly loan covenants. Domestic banks also reported
that they had stopped reducing the size of existing credit lines for commercial
and industrial firms, on net--the first time that banks had not reported cutting
such lines since these questions were added to the survey in January 2009.

Nearly all of the respondents that reported having eased standards or terms
on C&I loans cited more aggressive competition from other banks or nonbank
lenders (other financial intermediaries or the capital markets) as an important
reason for doing so, and about one-half of the respondents that eased pointed to
a more favorable or less uncertain economic outlook. Respondents that had
tightened lending policies--primarily smaller banks in the sample--generally
attributed the move to a less favorable or more uncertain economic outlook,
rather than bank-specific factors such as concerns about their capital or
liquidity positions.

On balance, demand for C&I loans from large and middle-market firms and
from small firms changed little in the July survey. In the April survey, banks
had reported weaker demand from firms of all sizes. A shift in customer
borrowing to their bank from other credit sources and customers' increased
financing needs for inventory and receivables were the most common reasons cited
in the current survey by banks that had experienced higher loan demand. The net
percentage of respondents that pointed to customers' increased investment in
plant or equipment as an important reason for stronger demand for C&I loans
also edged up relative to the April survey.

In the July survey, U.S. branches and agencies of foreign banks reported that
their standards for approving C&I loans had remained basically unchanged,
after having reported a net easing of such standards in April. Small net
fractions of foreign respondents still reported having eased most loan terms in
the current survey, but the reported easing was much less widespread than in the
April survey. Moreover, branches and agencies had tightened premiums charged on
riskier loans, on balance. A modest net fraction of branches and agencies of
foreign banks reported that demand had been stronger over the previous three
months.

Special questions on lending to European firms and their affiliates
and subsidiaries. A set of special questions asked respondents about
lending to firms headquartered in Europe--both nonfinancial companies and banks,
as well as their affiliates and subsidiaries. Only about 22 of the 57 domestic
respondents indicated that they made loans or extended credit lines to European
firms. While only small net percentages of domestic and foreign respondents
indicated that their standards and terms on loans to European nonfinancial
companies had tightened, somewhat larger net fraction indicated that they had
tightened their policies for lending to European banks. Both domestic and
foreign respondents indicated, on net, almost no change in demand for loans from
European firms or their affiliates or subsidiaries. However, modest net
percentages of respondents of both types reported that the number of inquiries
regarding the availability of new or increased lines of credit from European
borrowers had risen over the past three months.

Questions on commercial real estate lending. In the July
survey, most respondents reported no change in their bank's standards for
approving commercial real estate loans. The net percentage of banks that
reported that their standards had tightened was small, and it dropped slightly
relative to the April survey. Overall, the net fraction of banks that reported
that demand for CRE loans had decreased continued to be small.

Questions on residential real estate lending. On net, a
small fraction of domestic banks reported having eased standards on prime
residential mortgage loans; the few respondents that had eased standards were
all large banks. The increase in demand over the past few months for prime
residential mortgage loans reported by several respondents to the current survey
marked a reversal of the net weakening of demand for such loans reported in the
April survey. Fewer than one-half of survey respondents indicated that their
bank originated nontraditional mortgage loans. Of these respondents, nearly all
reported no change in their bank's standards for extending such loans. The small
number of banks that reported an increase in demand for nontraditional mortgage
loans balanced the number of banks that reported a decrease in demand. In the
April survey, one-third of banks, on net, reported that demand for
nontraditional mortgage loans had weakened.

A small share of respondents reported that their bank's standards for
approving home equity lines of credit (HELOCs) had eased over the past three
months. However, a similar fraction of respondents indicated that they had
decreased the size of HELOCs for existing customers over the same period. A
small net percentage of banks reported that demand for HELOCs had weakened, on
net, down sharply from the April survey.

Questions on consumer lending. The net percentage of
respondents that reported an increased willingness to make consumer installment
loans increased relative to three months ago, extending the upward trend that it
has exhibited in recent quarters, reaching the upper end of its range over the
past decade. Consistent with this increased willingness, respondents, on net,
reported a net easing of standards for approving consumer loans other than
credit card loans. However, terms on consumer loans other than credit card loans
were reported to have been roughly unchanged, on net, in the July survey.

Indicators of changes in standards and terms for approving applications for
credit card loans were mixed. A few banks reported having eased standards, but
small net fractions of respondents indicated that they had tightened terms and
conditions on credit card accounts. Moreover, a small fraction of banks, on net,
reported having reduced the size of credit card lines for existing customers,
though that fraction has decreased noticeably over the past few surveys. Large
banks reported a net easing of terms on credit card loans, while other banks
reported a net tightening.

On balance, a small percentage of respondents indicated that demand for
consumer loans of all types had weakened. A modest net percentage of large banks
reported an increase in demand for the second consecutive quarter, but a
slightly larger net percentage of other banks reported a decrease in such
demand.

1Respondent banks received the
survey on or after July 13, 2010, and responses were due by July 27, 2010.
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2For questions that ask about
lending standards or terms, reported net percentages equal the percentage of
banks that reported having tightened standards ("tightened considerably" or
"tightened somewhat") minus the percentage of banks that reported having eased
standards ("eased considerably" or "eased somewhat"). For questions that ask
about demand, reported net fractions equal the percentage of banks that reported
stronger demand ("substantially stronger" or "moderately stronger") minus the
percentage of banks that reported weaker demand ("substantially weaker" or
"moderately weaker"). Return
to text

3Large banks are defined as banks
with assets greater than $20 billion as of March 31, 2010. Return
to text

4Small firms are generally defined
as firms with annual sales of less than $50 million. Return
to text

This document was prepared by Mary Beth Chosak with the
assistance of Thomas Spiller, Division of Monetary Affairs, Board of Governors
of the Federal Reserve System.